The Seattle suburb where Jeff Bezos and Bill Gates both live is running out of money

Bill Gates's house in the Medina Area of Seattle.
Ted Soqui | Getty Images

Jeff Bezos and Bill Gates are the richest people in the world, worth $119 billion and $107 billion respectively, according to Bloomberg.

Amazon is headquartered in Seattle and Microsoft is just outside the city, and both billionaires have homes in the nearby small town of Medina, Washington.

With a population of just over 3,000, Medina is the seventh richest zip code in the U.S. with a median home value of $2.77 million, and the town has a median household income of $186,464 in 2017, the most recent data available. (By comparison, the 2017 median household income in the U.S. was $60,336.)

Yet Medina is running out of money — and the irony is lost on no one.

So how is the home of the richest people on the planet coming up short?

The problem is, even though Medina home values are increasing, the city's income is not rising at the same speed, the city says.

"You may find it hard to imagine that the City doesn't have enough income to sustain current service levels, particularly in this economy. While property values continue to rise, the City's tax revenues don't rise in tandem," reads a June 2019 Medina city newsletter.

That's because by law, the local government cannot increase the amount of tax revenue it collects by more than 1% each year without the residents voting to approve a larger amount.

The property tax rate in Washington state is set as a rate, not a percentage, Medina's director of finance Julie Ketter tells CNBC Make It. For Medina, the property tax rate is $7.92925 per $1,000 of assessed value.

Of that, only $0.63486 goes to the city of Medina, Ketter says. (Another $2.42782 goes to local schools, $0.12266 goes to the port, $1.21906 goes to the county, $0.37441 goes to the library, $0.21762 goes to emergency medical services, $0.09660 goes to a flood fund, $0.20700 goes to regional transit and $2.62992 goes to the state school fund.)

TWEET: Need more proof that Washington's tax system is as messed up as it gets?

The most expensive home in Medina is assessed by the King County Assessors office as being worth $131,239,000, Ketter tells CNBC Make It. This home — presumably Gates "Xanadu 2.0," which has 24 bathrooms and a trampoline room — has a $1,040,627 total property tax in 2019. Of that, $83,318 will go to the City of Medina.

But comparatively, the majority of the homes in Medina are not as expensive: The median value of a home in Medina is just over $2 million, Ketter says.

Billionaires Bill and Melinda Gates play this 'crazy' game to unwind
Billionaires Bill and Melinda Gates play this 'crazy' game to unwind

Therefore, in 2019, Medina will bring in only $2.8 million in property taxes, the City says. A 1% increase of that is an additional $28,000, which is not enough to cover rising expenses. "Fire services alone increased by nearly double that amount in 2019," the newsletter reads.

To fix the budget shortfall in Medina, the town will vote in November to lift the cap on property taxes enough to "provide funds to continue current service levels without significant cuts," the newsletter reads.

The proposed increase of property taxes in Medina would increase the property tax by 20 cents per $1,000 of assessed value, Ketter says. For a $2 million home, that would be $400 per year in 2020 and an increase of $589 per year in 2025, Medina says.

The city, if it continues to operate without raising property taxes, will have a deficit of $500,000 by 2020 and a deficit of $3.3 million by 2025, the City says.

"We're on an unsustainable path," the newsletter says.

The fiscal problem in Medina is illustrative of a larger taxation issue in the state of Washington, which doesn't have a personal or corporate income tax. In 2001, a rule limiting the increase in revenue brought in from property taxes to 1% per year was voted in. The state's supreme court overturned the law and then it was brought back again in 2007.

The cap is so restrictive that it can cripple local budgets.

"Need more proof that Washington's tax system is as messed up as it gets? Even the richest town in the state can't make it work," Seattle Times columnist Danny Westneat wrote of Medina on Friday. "The town of 3,200 is discovering what King County, Seattle and countless other municipalities around here have been screaming for nearly two decades: the math doesn't work anymore."

Westneat continued: "I hear some really important people live in Medina. Maybe now that it's their town that's said to be in 'dire straits,' these questions will finally get some traction."

Representatives for Bezos and Gates did not immediately respond to CNBC Make It's request for a comment.

Correction: This story has been updated and corrected to reflect that Microsoft's headquarters is outside of Seattle.

See also:

Bill Gates: This is a 'great' way to use your tech skills

Jeff Bezos' single teen mom brought him to night school with her when he was a baby

Jeff Bezos says dad emigrated from Cuba alone at 16: 'His grit, determination, optimism are inspiring'

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